Only seven years ago, Tamil Nadu was in a state of shock. Nokia, one of the Indian region’s largest and most affluent employers, had abruptly closed its factory and left. Fast-forward half a decade, however, and the state has been lavished with a stream of major investors from Europe, China, South Korea and elsewhere. 

The Covid-19 pandemic has not put a stop to the party. In fact, in some ways it may have accelerated investment into the state (more on that later). The numbers show that Tamil Nadu, located on the southernmost tip of India, continued to attract steady inflows of foreign direct investment (FDI) during the 2020–21 financial year, to the tune of approximately $3bn (Rs224bn), according to India’s Department for Promotion of Industry and Internal Trade. This made the region India’s fifth-top destination for investment, after Gujarat, Maharashtra, Karnataka and Delhi (in that order). 

The state, therefore, is very much part of India’s wider economic success story. Despite the impact of Covid-19, the country attracted its highest-ever inflow of foreign investment in 2020, valued at $64bn, according to data from the UN Conference on Trade and Development. This comes against a backdrop that saw global FDI flows drop by 42% in 2020.

Tamil Nadu’s manufacturing hub driven by automotives 

Home to megacity Chennai and other economic hubs, Tamil Nadu is India’s tenth-largest state by area and its second-largest state economy. The region has experienced spectacular growth in the three decades since India liberalised its economy, thanks to its locational advantages, investment in infrastructure and logistics, predictable business environment and stable political scene

Tamil Nadu boasts strong economic diversification and heavy industrialisation, as borne out by its numbers. The service sector accounts for 45% of the state’s economic activity, while manufacturing makes up 34% and agriculture 21%. Major foreign investment, however, has very much been dominated by manufacturers, particularly in the automotive and electronics industries. 

“Automotive success in Tamil Nadu was really kicked off with Hyundai coming in Chennai in 2003,” says Nitin Potdar, a mergers and acquisitions lawyer with law firm JSA, a Mumbai-based practice, and author of the recently published book GPS Paradigm. “This led to other Korean companies setting up shop. Hyundai got a large piece for a very good price, and was offered a lot of fiscal and labour incentives. Plus it saw that the infrastructure was good for exports.”

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Since then, the industry has gone from strength to strength. In 2018, the state accounted for 45% of India’s total auto exports (and 70% of total passenger vehicle exports). Chennai, known as ‘the automobile capital of India’, is very much at the centre of this, and is home to Suzuki, Toyota, Kia and others. Meanwhile, Tamil Nadu is a base for more than 80 auto component manufacturers, and still holds the position of being India’s largest tyre producer. 

Little wonder, therefore, that the region is among the top ten automotive locations in the world with an annual installed capacity of 1.71 million car units. Every three minutes it makes a car, every two minutes a truck and every six seconds a motorcycle. 

An electronics hub that is welcoming the China-shift

Automobiles aside, Tamil Nadu has fast become India’s second-largest manufacturer of electronics hardware. More specifically, it accounts for 16% of the country’s production capacity in computer, electronic and optical manufacturing. 

However, it is the growth of this industry that is particularly impressive. Recent data shows that Tamil Nadu has markedly reduced the gap to its main domestic competitor, the Indian new city of Noida. Four years ago, Tamil Nadu accounted for 16% of the country’s electronic production while Noida made up 30%. This gap has since reduced, with the region’s production now at 20% and the Noida cluster at 27%.

Pioneering this growth has been a host of foreign and domestic giants setting up shop in Tamil Nadu in recent years. At the forefront are Foxconn, Salcomp, Flex and Tata, alongside a slew of other companies making iPhones, or iPhone parts, as well as other flagship phones. In particular, the past few years have seen a notable rise in Chinese tech manufacturers creating operations in the region, such as Lingyi iTech. All together, electronics companies employ 70,000–80,000 people in Sriperumbudur alone, Tamil Nadu’s most industrialised region – its growth is one of the main reasons the state boasts India’s highest number of factories and industrial workers.

In light of this impressive momentum, Tamil Nadu has an opportunity to increase its share of FDI and remain the leader in industrial development in India, according to a recent report from KPMG and Ficci, which also praises initiatives being taken by the state to promote investment. The report points out that the second half of 2021 has seen ever-larger companies – from locations such as China, South Korea and Japan – start to consider India as a good location to shift their current production to due to rising manufacturing costs at home or elsewhere (while Covid-19 has pushed up demand for diversified supply chains). 

Tamil Nadu is set to benefit from this. KPMG’s report says that, beyond automotives, the region is emerging as a leader for LCD display fabs, toy production, footwear, bulk drugs, gadgets, processed seafood, defence electronics and specialised textiles for a variety of applications. After all, Tamil Nadu, the land of Kanjivaram sarees, houses India’s largest spinning industry.

The state is without doubt a hub for logistics and exports, boasting well-developed infrastructure through an excellent road and rail network, alongside seven airports. The state’s coastline of 1,076km is the second-longest in India, dotted by four major ports. Tamil Nadu ranked third in India’s Export Preparedness Index in 2020. The state is also home to 41 operational special economic zones (the most in India), as well as 39 industrial clusters and five industrial corridors. 

It is no surprise, therefore, that in 2019 Tamil Nadu’s export volume stood at $30.5bn, 9.25% of India’s total. However, the state is not just exporting electronics and automotives. It also has very significant export markets for IT services, pharmaceuticals, leather products, chemicals, plastics and engineering, while being one of India’s major hubs for renewable energy and tourism. 

In short, while some of India’s other regions have long industrial traditions, Tamil Nadu has more recently burst on to the scene to become a global name in automotives and, increasingly, electronics. As companies look for alternatives to complement their Chinese operations, Tamil Nadu is very likely to make the list. 

This is the fourth article in our ‘Indian Cities and Regions of the Future’ series. Other articles are: